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October 17, 2002
UNEP Advises Financial Sector on Threats and Opportunities Related to Climate Change
    by William Baue

A recent United Nations Environment Programme Finance Initiative report outlines the financial sector's risks and opportunities regarding climate change.

The Intergovernmental Panel on Climate Change (IPCC), the international authority on the science of climate change, recently confirmed that human activity does indeed contribute to climate change. Reactions to this pronouncement vary widely: some deny the veracity of the statement and others acknowledge the truth of the statement and work toward solutions. Many simply cannot fathom how climate change may affect the future. A recent report speaks to how climate change is affecting the present and how it may affect the future. Earlier this month, the United Nations Environment Programme (UNEP) Finance Initiatives released a study conducted by Innovest Strategic Value Advisors that documents the economic impact of climate change on the financial sector. The report also describes how the financial sector can best mitigate the negative effects of climate change while seizing on business opportunities created by climate change.

"This report is a wake-up call for the global financial community," UNEP Executive Director Klaus Toepfer said. "It highlights the real risks and economic perils [financial institutions]are facing as a result of human-influenced climate change. It also underscores how, given the financial muscle available to them, these institutions could move markets and minds to deliver a cleaner, healthier, and less vulnerable world for the benefit of the world economy, for the benefit of people everywhere."

The report, entitled Climate Change and the Financial Services Industry, estimates that worldwide economic losses due to natural disasters that have been exacerbated by climate change are doubling every decade. It is estimated that economic losses will reach $150 billion per year in the next decade. Market mechanisms represent the quickest, most equitable, and most cautious solutions, according to the report. Certain solutions also promise to be profitable. For example, the report estimates that the greenhouse gas emissions trading market could generate $2 trillion annually by 2012, and the clean energy technologies market could be worth $1.9 trillion by 2020. Working toward solutions to climate change is not only good for society and the environment, the report posits; it is also good business.

Market solutions are not contingent on international policy but can proceed while the global community strives toward consensus on the Kyoto Protocol and other regulatory responses to climate change. The report assesses how each segment of the financial sector, such as insurance, commercial banking, and asset management, is reacting to climate change. The report explains that most mainstream asset managers remain unaware of how climate change poses a risk to investments. However, some asset managers are conscious of the risk.

"For those asset managers and pension funds aware of the issue, engagement with affected companies is the preferred course of action, rather than disinvestment," the report states. "Among socially responsible fund managers, climate change is used as a screening criterion, but the screens used tend to be very crude."

Innovest Managing Director Martin Whittaker, who worked on the study, explained this characterization in more depth.

"The screens are not made on the basis of any systematic, meaningful, rigorous quantitative financial or economic analysis of the impacts of climate change. . . ." Dr. Whittaker told "Rather, they tend to be made on the generalized basis that climate change is a pressing social and environmental matter that needs to be dealt with by all."

However, many SRI asset managers do employ the report's "preferred course of action," namely, active engagement with companies. For example, Trillium Asset Management filed a shareowner resolution asking Eastman Kodak (EK) to report on its greenhouse gas (GHG) emissions and on how much it would cost to substantially reduce GHG emissions. The resolution received 29.4 percent shareowner support. This is ten percentage points more than the highest level of support previously recorded for a climate change resolution. A 1994 resolution at Niagara Mohawk Power (NMK_pb) received 19.4 percent. This proxy season, other SRI asset managers, including the Calvert Group, Friends Ivory & Sime (now ISIS Asset Management), and Harrington Investments, also filed shareowner resolutions relating to climate change.

Climate Change and the Financial Services Industry advocates such in-depth communication with companies to address climate-change related issues. The report also makes more general recommendations to all financial service providers to raise awareness of climate change and incorporate climate change considerations into their mainstream business practices.


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